Inflows into dedicated EM bond funds were again strong in the week ending 4 March, with now close to USD 3.0bn flowing into EM bond bunds in the last five weeks.
Total inflows in the week ending 4 March were USD 697mn, dominated by hard-currency bonds, which received all of the inflows in the amount of USD 977mn. Flows into localcurrency bonds remain mixed with outflows of USD 182mn in the week ending 4 March, taking net outflows to USD 703mn YTD.
After two strong weeks of inflows, blend funds had outflows of USD 97mn in the week ending 4 March, although YTD inflows are positive at USD 221mn. Overall flows YTD into EM bond funds have turned slightly positive to USD 28mn.
The flow of funds into hard-currency funds rather than local funds, in our view, is reflective of a combination of the EM risk environment and strength in the USD driven by rising US treasury yields.
EM currencies have been very weak across CEE and LatAm, with only EM Asian currencies managing to have only a minor depreciation.
Unicredit notes as follows on Monday:
- We think the risk environment, while currently accommodative, is at risk of deteriorating with indicators such as the VIX Index and swap spreads still at tight levels.
- We expect that the ECB's QE will be short-term positive for CEE bonds but think that the EM bond market will be increasingly driven by US treasury yields.
- We expect these will continue to grind higher and continue to put pressure on EM bonds, particularly at the long end of the curve. The rotation out of local bonds into hard-currency bonds is reflective of this view and we expect this trend will continue over the next few months
